By: Rhona O'Connell, Head of Market Analysis
The Fed; running to stand still?
We have: -
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Aggressive PPI
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Declining trend in Core CPE
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Aggressive CPI – especially fuel
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Beige Book reporting moderation in housing (which is 42% of CPI) and some slowing in in manufacturing. | |
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The next meeting of the Federal Open Market Committee is 26th and 27th July and comes after a very hot U.S. CPI number, which came in at 9.0% Y/Y with core at 5.9%, both on a seasonally-adjusted basis. The month-on-month basis may in theory well be more appropriate given that we still have some dislocations in the June 2021 figures on the pandemic legacy, but here too there is the obvious caveat revolving around the impact of the war in Ukraine. That said, the month-on-month gain was just 0.7% after 0.6% in June, and which equates on a linear extrapolation to 8.7% year-on-year.
U.S. Core PCE, %; a 60% correlation with the Fed balance sheet since 2008 and of 68% since January 2019
The PPI figures, released a day later, came in at 0.8% M/M and 11.3% Y/Y. The core numbers were 0.4% and 11.3% respectively. Stand-out numbers included a 54% increase year-on-year for Final Demand Energy with a 72% increase in Government Purchased Energy and an 87% rise in Energy for Export. Producer Output prices were up by 18.4%, with finished Goods Less Energy posting a 9.9% gain while finished foods excluding foods were up by 19.8% and finished services, “just“ 7.4%.
Within the CPI, as calculated by the U.S. Bureau of Labor statistics, food, and beverages account for 14.3% of the total (food is 13.4% of the total), housing is 42.4%, Apparel is 2.5% and Transportation is 18.2, with new and used motor vehicles accounting for 9.2% and motor fuel, 3.8%).
The June numbers included a 10.4% gain in the food sector. Obviously, cereals were high given what has been happening in the agricultural sector in the shadow of the Ukraine conflict, but fish and seafood were quite a lot higher, which perhaps reflects the cost of transportation.
An interesting element interesting here is the fact that the housing market appears to be slowing, due in some part to rising mortgage costs so the statement behind the Fed’s rate decision next week will be worth scrutinising to see which areas of the economy it does, or does not, refer to when it comes to framing the decision.
The Fed concentrates most closely on the core Personal Consumption Expenditure, the latest of which relates to May and was 4.7%, and which has been on a declining trend since 5.3% in February Headline PCE, i.e. including food and energy, was 6.3%.
So, the interesting point here is the extent to which the FOMC will look beyond the core PCE, given the way the global markets reacted to the CPI figure, especially as Chair Powell has been emphasising the degree to which Fed decisions are “data-dependent”. The most recent headline data appears to conflict with the PCE. To what extent the differing market forces will inform the Fed decision net week remains to be seen.
This makes the Beige Book, which is also a key element that informs the Fed’s decisions, particularly relevant this time. Released eight times a year and most recently yesterday, the Book is designed to characterise changes in economic conditions between publications. It compiles information from Bank and Branch Directors, businesses, economists, market exports and other sources.
The National Summary of overall activity in the period from mid-May to 13th July records several Districts reporting signs of a slowdown in demand and contacts in five Districts reported concerns over an increased risk of recession.
New auto sales remained sluggish due to low inventories in most Districts, while manufacturing activity was mixed, with supply chain issues and labour shortages continuing to hamper production; and housing demand weakening noticeably (see above), reflecting concerns over affordability so that housing inventory increased (it needed to!) and “more moderate price appreciation”. From the financial side, some financial institutions reported reduced loan demand because of higher mortgage interest rates.
Meanwhile gold has taken it on the chin over the past fortnight with factory orders and weak technical construction finally breaking the market’s sprit to take prices from $1,800 towards $1,740 on 5th and 6th July. The headline inflation figures put further pressure on the price as the markets remained so far in risk-off that the dollar has ben the only popular safe haven. The real sufferer was silver, which was already under pressure on the basis of gold’s non-performance and the clouded economic outlook; as gold buckled, silver crumpled and the ratio is at 93 as I write. Now we wait for next week.
Gold, silver the ratio and the correlation; short -term activity; wash-out, not for the first time this month
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